Tag Archives: startup legal fees

Recently I’ve written about potential conflicts of interest between you and your startup lawyer. Now for the main event: Stock for Fees.

This situation arises when a startup company offers stock to a lawyer in exchange for legal services. I’ve derived the following 2 postulates to explain why startups and lawyers agree to this setup:

1. Startups are broke.
2. Lawyers are expensive.

For the same reasons that your startup lawyer should not be on your board directors, stock for fees may affect your startup lawyer’s ability to give unbiased legal advice. Furthermore, Rule 1-8(a) of the ABA Model Rules of Professional Conduct provides that a lawyer may not enter into a transaction with a client unless:

(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) The client consents in writing thereto.

Thus, if your startup agrees to a stock for fees representation, you will likely sign a conflict of interest waiver from the firm stating that you were advised and had the opportunity to seek another lawyer about the stock for fees deal (along with other stock for fees conflict language boilerplate).

The most common stock for fees legal work is (a) incorporation & other related “getting launched” issues, and (b) financings. Incorporation stock for fees deals are usually set up as an agreed to amount of legal work (e.g. “$10,000 of legal fees billed at $400 hourly”) in exchange for an equity percentage of the startup. Startups that are about to go after funding or maybe even have a term sheet in front of them may offer a small percentage of stock in exchange for the law firm deferring legal fees until the financing closes.

In my practice, I have yet to do a stock for fees deal. The main reason I haven’t thus far is that I don’t want to add “GP of Early-Stage Fund” to my job description. That is, before agreeing to a stock for fees deal I would have to conduct a due diligence evaluation just like a VC would. (Of course, having a couple term sheets from VCs might preclude such a due diligence investigation.)

I may not be contributing cold hard cash to the startup, but my time is worth something. Instead of working for equity, I could be working on another paying client’s deal, blogging, or riding Tony Hawk’s Big Spin with my son. Plus, malpractice liability doesn’t go away if I don’t receive cash consideration for legal services.

In any event, both startup and lawyer should be prudent before agreeing to a stock for fees deal. And a startup should never take it personal if a lawyer or firm won’t do a stock for fees deal.

Sorry, there’s a glitch with the documents and we had to take them down. We hope to have something back soon.

Well 6 days later the same error message appears if you visit the link. This leads me to believe that WSGR really did have an issue with the release of the documents. I do understand why WSGR would have an issue with the release, but I hope WSGR and Y Combinator can work it out.

Think back to the last time you wrote a business plan for a startup. Do you recall your estimated expense for legal fees? $1,000? $10,000? $0?

How much to spend on legal fees is a common issue for startup companies with more than one correct answer. However, there are a few factors that suggest your startup should loosen up the purse strings.

Back in my college days (post-Prodigy, pre-Google), I wrote a business plan for a Web 0.01 startup company and allocated a meager $500. I had no idea what I’d be getting for that $500, but I figured my business plan software included the “legal fees” entry for a good reason and I did not want to leave it blank.

Fast forward to today. Going to law school, running my own startup company, and now representing dozens of other startup companies hasn’t led me to the exactly-how-much-to-pay-your-startup-lawyer magic number. Instead, I’ve learned to spot the issues that suggest a startup company should be spending more rather than less on legal fees:

(1) Number of Founders: If your startup is going to have more than one founder, this would indicate you’ll need to add to your legal fees total. Establishing and documenting the co-founder relationship is one of the most important aspects of a having a successful startup company. I wrote a previous blog article regarding startup co-founders.

(2) Raising Capital: If you plan to raise capital from any third party, whether from your mother or Oak Investment Partners, your must increase your legal fees. No exceptions.

(3) Public Company – No, I don’t mean a “publicly-traded” company. Rather, the more your startup will have a public presence, the more you will need to spend protecting your startup company from infringers (such as trademarks, etc.) and other 3rd parties.

Guy Kawasaki provides us with a real-world example of how much startup legal fees may run. Guy paid $4,824.13 in legal fees when he started Truemors. And his legal fees included the following:

Guy’s post also has some wise advice about how much to spend on startup legal fees:

You could do less legal work and do it cheaper, but if you ever want to raise venture capital much less go public or get acquired for more than scrap value, this is not the place to save a few thousand bucks.

While Guy paid $4,824.13, I do not recommend using his number as a benchmark for your legal fees. There are too many variables to consider which are both internal and external to your startup company. Thus, I am hesitant to even provide a range of estimated startup fees. But if you consider the three issues (number of co-founders, raising capital, and public company), you will know whether paying your startup lawyer a larger amount is warranted.